Preface: Before 2012 once again embroils us fully into the ongoing saga of the eurozone’s Crisis and its global ramifications, I thought it might be a good idea to start the year on a reflective mood. The topic I chose is complexity and the inadequate responses to it that have landed us in a mire of our own making; a Crisis that could have been defeated during 2011, and that it is still possible to stop on its tracks in 2012. Yet a Crisis which will probably be allowed to run its terrible course, with hideous consequences for Europe and the world, as a result of a motivated flight from rational responses to a complex, yet not insoluble, problem.

Introduction: Complexity is the stuff of existence and its proper acknowledgment a prerequisite for a successful life. Our problematic relation with complexity has been a cause of many a calamity, the Crash of 2008 and its aftermath (especially here in the eurozone) being a case in point.

Wherever we look, and the Earth’s environment is not a bad place to start, humanity has struggled to come to terms with complex systems. Economies, the archetypal human artifact, are even more notorious than ecologies for evolving in ways that humans cannot grasp by means of our run-of-the-mill, pacifying, oversimplifying models. And when our actions, policies and choices, based as they tend to be on such models, give rise to meltdowns, crises and stubborn failures, we have a tendency to move to the other extreme; the one I like to label Complexity Fetishism’. It seems to me that the great challenge for 2012 is to find ways of plotting a course that avoids the pitfalls of both Complexity Denial and Complexity Fetishism.

This four-part series of posts will comprise the following installments.

Part A: The analytic-synthetic approach to socio-economic systems as a form of Complexity Denial

Part B: The political lure of naive models in the era of financialisation

Part C: Crisis and the temptation of Complexity Fetishism: The eurozone case

Part D: A challenge for 2012: How to transcend the sterile confrontation of Hayekians, Keynesians and Marxists

Today we begin with Part A. Parts B,C and D will be added in regular intervals within January.

Part A – The analytic-synthetic approach to socio-economic systems as a form of Complexity Denial

A.1 The lure of the ‘analytic-synthetic’ approach: The bewildered watchmakers

Consider the analytic-synthetic method of a watchmaker faced with a strange mechanical watch. First, she takes it carefully apart with a view to examining the properties and function of each of its tiny cogs and wheels. Then, she screws it back together. If a reassuring ticking sound ensues, this must surely mean that the fragments of knowledge imparted by the separate study of each of its parts were successfully synthesised into a macro-theory of the watch.

This parable of an ideal reductionist, analytic-synthetic economic approach has been implicit to economic theorising since the first stirrings of what today counts as economics-proper; the sort of economics practised and taught in the world’s (i.e. US) best schools. To the economists who sought a break from the politically motivated, fully discursive ‘mumbo-jumbo’ of Adam Smith, David Ricardo, Karl Marx, but also of Ludwig von Mises, Joseph Schumpeter and Friedrich von Hayek, the analytic-synthetic approach (and a new focus on ‘rational economic man’) became the litmus test of ‘scientific’ economics (see Philip Mirowski’s, excellent 1989 book, Against Mechanism).

In this new ‘scientific’ mind frame, individuals are the equivalent of the watchmaker’s cogs and wheels: parts of a whole to be understood fully (complete with determinate behavioural models) and independently of the whole their actions help bring about. Thus, any socio-economic phenomenon under scrutiny is to be explained via a synthesis of partial knowledge derived at that individual level.

But there is a snag: Unlike the world of mechanical watches, society consists of ‘parts’ which lose their ‘properties’ once separated from one another. A pulley or a cog can be fully described in isolation to the other mechanical parts with which it was designed to work harmoniously. Indeed, the ‘relations’ between the watch’s parts are straightforwardly revealed, to the trained eye, through close inspection of the parts’ shape, size and other physical properties. In the social world, however, things are different. When Aristotle spoke of humans as political animals, or when Hegel narrated his master-slave paradox, they were dwelling on this radical difference between the constituents of society as opposed to the parts of mechanical systems (regardless of their complexity). More precisely, in society (as opposed to the internals of a watch) the relations between its ‘parts’ (i.e. people) are not deducible from primitive data concerning these ‘parts’ alone (e.g. from data on persons’ means and ends) but, also, it is simply impossible to understand the properties of ‘parts’ (or persons) in isolation to one another.

In summary, economists try to ‘analyse’ economic systems like watchmakers taking apart a mechanical watch. Yet, to their dismay, they soon realise that the various ‘parts’ lose their integrity the moment they are isolated from the ‘whole’ which they make up. But the lure of mechanism, of the analytic-synthetic approach, is too strong. It is an approach that promises economists the title of ‘scientist’ with all the perks that come with this identity. Thus, they persist with the watchmakers’ strategy. Alas, when they put the watch back together, once they have completed their study of its ‘parts’, they find that it does not work. That the only way they can claim success (i.e. understanding the social economy) is by faking their results; by presenting their clearly malfunctioning models as relevant. This they can get away with only if and when their audience is too blinded by the models’ mathematical complexity to notice that they fail miserably to account for the real complexity they are supposed to… model. The next section, A.2, offers a stylised example.

Imagine a table piled up with ten thousand gold sovereigns. Ann and Ben are given the opportunity to take them all as long as they respect a simple rule. They must approach the table one at a time and, on each approach, collect a single coin (with Ann kicking the process off). Crucially, they are also given the right to collect two coins on the understanding that, the moment either player exercises that right, the game ends with the remaining coins withdrawn. In short, if the person collecting at any visit takes two coins at once, it is ‘game over’ for both (though they can hold on to the coins they have already collected). To continue visiting the table, accumulating more and more coins until there are none left, neither must collect more than one coin at the same visit. As long as Ann and Ben collect a single coin every time they come to the table, they shall clean up (amassing five thousand gold sovereigns each). But will they?

The analytic-synthetic approach, when combined with greed, comes to a startling conclusion: If rational, and ‘analytic-synthetic’ in their thinking, Ann will end up with two coins while Ben will end up with nothing! Thus, a rational Ann is instructed to collect two coins on her first visit, thus ensuring that 9998 coins are wasted! But how can this be rational?

This is how the analytic-synthetic approach reaches its misanthropic conclusion: Assuming that Ann and Ben are rational people who try to work out analytically how to behave in this game, the analytic-synthetic approach (the watchmaker’s method) invites them to break the gaming process into its constituents ‘parts’, study each one separately, and only then put together the derived knowledge into an overall strategy for playing this game. The following figure offers a break-down of the overall game into its ‘parts’, so as to allow us to see how the analytic-synthetic reaches its paradoxical conclusion. [Note that the figure allows for the more general case of G coins, in our case G=10000, plus more than two players; here we stick to two: Ann and Ben.]

Like plotting a course out of a maze, it is easiest to do so by starting at the ‘end’ (in the maze’s case the ‘exit’, here the last visit at the table) and work backwards. Here is what Ann expects to happen in each stage, beginning with the last one first:

Last stage – 2 coins left on the table:Ben is visiting the table and will, obviously, take both coins.

Penultimate stage – 3 coins left on the table:At this stage it is Ann’s turn to visit the table. Should she take one or two coins? She will, of course, collect two of the remaining three coins as she is anticipating that, were she to take only one, the game will shift to the last stage (see above) where Ben will collect both remaining coins. Ann, naturally, prefers to be the one that collects the 2 out of the, currently, remaining 3 coins. [Note: One coin is ‘lost’ to both players].

Last stage but 3 – 4 coins left on the table: Ben is visiting the table, knowing (see above) that if he collects one coin, then Ann will end the game by collecting two. Thus, he chooses to collect 2 coins himself. [Note: Two coins are ‘lost’ to both players.]

…

Second stage – 9999 coins left on the table: Ben is at the table. For reasons already seen, he expects that if he takes one then Ann will take two. So, he takes 2 coins, so as not to be left with a single coin. [Note: 9997 coins are ‘lost’ to both players.]

First stage – 10000 coins on the table: Ann is kicking off the game. She has worked out (see immediately previous paragraph) that, given a chance, Ben will end the game immediately. So, she chooses to do the best she can for herself, under the grim circumstances: She collects two coins immediately, ending the game. [Note: 9998 coins are ‘lost’ to both players.]

Summary: It can be brilliantly rational to act irrationally

The analytic-synthetic approach to complex socio-economic interactions suggests that we break the latter down to their constituent ‘parts’ (stages of the game in the above example), study each one individually (just like the watchmaker studies a mechanical watch’s cogs and wheels) and then synthesise what we have learnt to come up with an overall conclusion about what it is best to do and how to behave ‘optimally’. In the example above, this method yields a paradoxical piece of advice: Waste 9998 of 10000 available gold sovereigns! Could this be good advice? Of course not.

So, where is the snag? The snag resides in the analytic-synthetic approach itself. It is simply untrue that the complexity caused by this strategic interaction can be reduced by breaking the overall interaction into smaller ‘parts’ that are then studied as separable interactions. Indeed, it is a grave error to think that we can reduce complexity via the analytic-synthetic approach in any complex interaction that involves strategic, inter-dependent, thinking of the sort that is prevalent everywhere – from party goers deciding what to wear at the party to the money markets. Why not? Because the

analytic-synthetic approach to interactions like the one in our coin example requires what philosophers refer to as fallacious ‘counterfactuals’.

Here is the main counterfactual involved: Did you notice that the whole analysis began at the last stages, or ‘parts’, of the interaction (at the point when there were only three coins left and Ann had to choose between collecting one or two coins)? And that, on the basis of that answer extracted from the last stages, the analysis told Ann to collect two coins at the very beginning (when all 10 thousand coins lay on the table)? In short, Ann was advised to end the game at the outset on the basis of an analysis of what would have happened if it continued to the end; i.e. if she… ignored its advice!

But if it is uniquely rational to collect two coins whenever one is given a chance to visit the table, how can we apply rational analysis to much later parts of the game that rational players would never reach (since, if rational, their behaviour would have killed the game off ages before)? This is the killer counterfactual that ought to lead us to the only safe conclusion here: There exists no uniquely rational way to play this game!

Yes, there is an analytic-synthetic logic that advises Ann to kill the game immediately. But there are compelling arguments that subvert the analytic-synthetic logic and point in precisely the opposite direction. Like the one which follows:

The logic of penny-pinching left Ann with pennies, Ben with nothing, and a whole lot of gold sovereigns lost to both. Awfully wasteful outcomes of this nature abound all around us: Smart people falling prey to their own ‘cunning’. And yet this type of failure is neither inevitable nor genuinely rational. It is just what we get when a most narrow sense of rationality takes over from reasonable judgement. Thankfully, a truly rational Ann can escape the straightjacket of the economists’ foolishness (parading as the utmost in rationality) as long as she is willing to think critically. Here is how:

Suppose that a rational Ann is, indeed, impressed by the analytic-synthetic logic and the wisdom of collecting 2 coins at the beginning. But suppose too that her critical thinking cannot rest until she asks her own ‘counterfactual’:

“What if I do not do as the analytic-synthetic method suggests? What if I collect only one coin? How will Ben respond? Is there no chance that he will think that I have gone bonkers, or soft-headed, or altruistic (i.e. caring not only about how many coins I get but also interested in his take too)? And if by taking a single coin now I give him a reason to take only one coin in the second stage, if only to give me another chance to ‘mess up’ (i.e. to collect a single rather than two coins) in the third stage, then why not do so? For if this ploy, of appearing ‘irrational’ or ‘altruistic’ to him, does the trick, then I get a chance to collect at least three coins (one now and two in stage three). What is so ‘irrational’ or ‘altruistic’ about that?”

The answer is “nothing”. Thus, following a good hunch, Ann realises that she can profitably subvert Ben’s expectations by diverging from the edicts of the economists’ logic. Indeed, she realises that such subversive behaviour increases not only her payout but also Ben’s. So, if it is rational to subvert the analytic-synthetic method, the latter cannot possibly maintain the monopoly on good advice or, indeed, good analysis. In fact, the analytic-synthetic approach proves analytically, and logically, flawed. In the end, the only thing that rational Ann can do is rely on a form of judgement that is irreducible to calculation.

As I wrote in the conclusion to the previous section, “economists try to ‘analyse’ economic systems like watchmakers taking apart a mechanical watch. Yet, to their dismay, they soon realise that the various ‘parts’ lose their integrity the moment they are isolated from the ‘whole’ which they make up.” In the gold sovereign game above, the point was that trying to isolate the game’s various stages from one another and, then, to synthesise those analyses into a grand theory of what Ann and Ben ought to do fails miserably because Ann and Ben are… cleverer than that; because rational humans can subvert the silly advice arrived at mechanistically by means of analytic-synthetic approaches suited well for algorithms (which cannot question their own programming) but wholly inappropriate for sentient humans who perfectly able to subvert the rules that ‘ought’ to be governing their behaviour.

In the conclusion to the previous section, I also wrote: “But the lure of mechanism, of the analytic-synthetic approach, is too strong.” It is indeed. Economists have built whole careers on this approach and are not happy to admit to its inappropriateness for social science. And when the financiers built whole Empires of Private Money on top of the economists’ analytic-synthetic approach, the manhandling of complexity turned from bad science into an oppressive regime – one that is now, post-2008, collapsing, with terrible repercussions for almost everyone.

A.3 Economic theory as a form of Motivated Complexity Denial

Economists are smart people. They see that their advice to Ann in the gold sovereign game is pretty poor and realise that they must do better. But they are not prepared to do the decent thing, which is to confess that, in a truly strategic social context, the analytic-synthetic approach is bunk. That this game’s complexity is not amenable to modelling, however clever the modeller. With glorious careers and CVs based on the analytic-synthetic approach and the ‘commercial’ success of their models, they employ copious amounts of intelligent thinking not in order to shine a light on the problem but so as to shore up their method; to restore its authority.

The result is models of increasing complexity which, magnificently, obfuscate more ‘efficiently’ the phenomena they are meant to elucidate. But, and this is their aim, their exceptionally obtuse mathematics put them beyond the reach of most people’s critical judgment. If this reminds you of how the CDOs proved successful, on the basis of their mathematically awful complexity (which stopped most investors from understanding what they were buying), it is because the two cases are very, very similar. As is the way in which the European Financial Stability Facility was structured. But more on these later…

To illustrate this form of sophisticated obfuscation, consider once more the gold sovereign game of the previous section. Ann’s subversive logic overturned the conclusion of the economists’ analytic-synthetic conclusion (that it is uniquely rational to let her greed overtake her senses and thus take two coins at the first stage). So, how did the economists respond? Instead of admitting defeat, they went for a tactical manoeuvre: They admitted that the best strategy may involve taking one coin at a time (at least for a while), as a form of ‘bluff’ that will make the other player more cooperative (i.e. willing to take only one coin for a while) but concentrated their intellectual effort on retaining the monopoly of their analytic-synthetic approach on the narrative of what a rational Ann and a rational Ben ought to be doing at each stage of the game.

More precisely, they start by conceding that, when visiting the table with k coins left on it (where k is considerably more than 3), a rational Ann will take into consideration three probabilities:

pk = probability assessment by Ben that Ann will choose one coin

πk = probability assessment by Ben that Ann is motivated by more than greed (e.g. by a sense that it is not right to take two coins and kill the game when there are so many coins awaiting both Ann and Ben to collect)

qk = probability assessment by Ben that Ann is (i) motivated by greed alone but (ii) she will still choose only one coin at this stage

The idea here is to ‘solve’, at each stage k, for a value of qk, as a function of pk and πk [e.g. qk = f(pk,πk)] What is qk? It is the probability that Ann will ‘bluff’ at stage k or, put differently, the probability that, with k coins left on the table, Ann will take one coin in order to convince Ben that she does not only care about her narrow-minded interest but that she is also concerned about his payout or about not being see as too selfish even when she is entirely selfish. And why do this? So as to have him take one coin too so as to exploit him (by taking two coins at a later stage of the game) before he does the same to her.

Employing highly abstract mathematics, economists then get down to work to compute these bluffing probabilities (qk) as a function of Ann’s (and Ben’s) initial reputation for being greedy and analytic-synthetic in her (his) thinking. The result is a form of convoluted mathematical superstition, rather than a model that has anything of interest to say about the actual behaviour of a rational Ann and a rational Ben. The values of qk thus derived are meaningless, from a practical perspective. All they tell us is with what probability a greedy, instrumental Ann must ‘bluff’ so as to ensure that the model can be solved in terms of… qk. What it does not tell us is what is in Ann’s interest to do under the circumstances (i.e. what qk to choose).

In summary, economists elevate their failure (to come to terms with strategic complexity) to a higher plane of mathematical complexity on which the original complex problem remains just as unsolved as it ever were. The only merit of this theoretical complexity is to confuse the mathematically ill-equipped, to have them think that the economists got to the bottom of the problem (when they have done no such thing). In short, it is a thinly veiled form of intellectual fraud. In reality, it constitutes a form of Complexity Denial which, however, allows them to pretend that the complex problem has been disentangled.

The reason why the economists’ efforts are extremely dangerous, and qualify as a form of toxic theory, is that, on the basis of their false claims (for having dissolved complexity) and the associated formulae [i.e. functions like qk = f(pk,πk)], they build theories which then ‘scientifically’ underpin both catastrophic economic policy (e.g. the macro-econometric estimates of the effects of austerity on growth) and the value of financial instruments (e.g. the infamous value at risk of financial institutions).

Epilogue

The purpose of these posts is to discuss the ways in which economic complexity has been misrepresented, denied and mishandled by economists, financiers and politicians. Part A began by focusing on the problematic application of the analytic-synthetic method to socio-economic interactions. It has claimed that economists have, for a while now, pursued an agenda that denies economic complexity its true nature in order to maximise their own discursive power both in the great Universities and in the corridors of power (both public and corporate). In the next instalments we shall see how the economists’ ultra-complex Complexity Denial has contributed significantly to the policies and institutional design that were responsible for the Crash of 2008 and the eurozone’s inexorable disintegration.

NEXT:The next part in this series, Part B, will be entitled “The political lure of naive models in the era of financialisation”.

I find nothing complex about the obvious realization that Merkozy is a complete and incurable moron.

Such simple truth alone is enough to illuminate the issue and promote to the level of urgency the immediate removal of Merkel from office, before the cancer she represents reaches any vital European organs.

Dean, Merkozy is only a moron if they are trying to SOLVE the EZ crisis. On the other hand, if they wish to USE the crisis to impose ‘structural adjustment’ (labor market reform) on not just their own own countries, but all of Europe, then what they are doing makes perfect sense. Early on both Sark and Merkel campaigned on platforms which included labor market reform. Sark was stymied by France’s strong unions and student uprisings. Merkel more of less co-opted the strong unions in Germany and succeeded in holding wage increases in check. Both were ultimately derailed by the financial crisis in their pursuit of weakening labor, and, in fact, both backtracked to some extent at home, but this crisis has enabled them to proceed under cover of a Euro-wide emergency. As Greece disintegrates it will be held up as an object lesson of what happens if EZ labor doesn’t “comply” with the “necessary” austerity.

Say Ann and Ben spent many years in university, each garnering a degree or two. Will they still come to the table and make a ‘rational’ decision, or will they make an ‘educated’ decision, and then embark on a mission to support that decision (and their respective degrees) using sophisticated obfuscation? The ‘rational’ decision would entail the negation of their many years spent in university (time, money, social status, etc.) and the degree(s) hanging in their office, whereas the ‘educated’ decision would further justify their university degree (the time and money spent to attain said degree, along with the social status that goes along with it).

My argument would have been; whose vehicle would we use to carry the combined 10,000 coins? Or, again, can I trust the other not to pinch some of my coins while I load as many as I can carry at one time onto the truck?

When we succeed as a civilisation; it is usually because we decide, as a community of individuals; to smile at each other each time we meet and, as a group; to enjoy each others input to the whole local economy.

Make your neighbour your friend and enjoy the fruits of your combined efforts. THAT is what made whole nations successful. Not an easy lesson for a feudalist.

Has anyone applied game theory to the current eurozone crisis? If so, what is the “rational” outcome? I’m not familiar with the literature in the field. I’ve read a lot of speculation from investment bank economists but none of them have used game theory.

The example given could also be taken as an illustration of economists, using the described analysis, believing that people believe that other people believe that the most greedy and selfish individual behaviour gives better individual outcomes over cooperative behaviour.

Happy new year, Yannis!
Thank you for the helpful illustration. Reading it, I have to think, we need a lot of cross-disciplinary studies. Especially we need trained philosophers, knowing about science theory, to “quality-check” sciences and their methods. We have sadly more than one discipline using dubious methods.
As you will know, in physics there has been a lot of philiosophical discussion on the methods of quantum physics or even cosmology. We should not be afraid to undergo our sciences such a “quality-check” and “methodical check”.
During my university time, we once discussed with a physics professor the question, why research is so important, that we build huge particle accelerators, for millions of Euro, when we have so many other social problems in our societies. The professor to my surprise, valued science just as part of mankind’s culture. Watching all those economists on TV or knowing of their influence on our top political personell backstage, one has to think how far these people must have left the path of true science, in the philosophical meaning of the term.
So probably, what we need is broader education paths, or valueing the knowledge of students choosing broader education paths and encouraging the same.

Nowadays any scientist/specialist incapable of a holistic view tends to be considered obsolete. Is lack of a broader education the problem? Maybe, in many cases. Lack of real education (as self-knowledge and self-esteem) creates inferiority / superiority complexes, I would add. If you add Fetishism on top of them… we might end up with “criminal” minds! 😉 🙂

The greedy method isn’t the best one in game theory. But, if I were Ann I would take all the money and leave as golden boys do.
Remember, one million mandarins for one pinch of gold, just pressing the button.
Capitalism is vandalism. As long as we live in this system, we have to press it, or mandarins will do. :-$

Is professor Varoufakis a crypto votary of the SUBJECTIVE Austrian School of Economics? While inappropriately, derisively, and strangely disparages and dismisses the teachings of von Mises, Schumpeter, and Hayek as “mumbo-jumbo,” from which fresh newfangled economists like him have to be freed from its primitive spell, he nonetheless uses their philosophical method of SUBJECTIVE REASON to rescue the pure maiden of economics from the fatal embrace of algorithmic objectivism.

Glad you noticed it. It is the mainstream of the economics profession that think of Smith, Ricardo, Marx, von Mises and Hayek as “mumbo jumbo”. Not me! (While I retain my disagreements with all these pillars of political economics, I harbour deep respect for each one of them. A respect that mainstream economists can only feign while, in practice, they are incapable of engaging with their thinking at any serious level.

I enjoyed this, and waiting for the next parts. I wish I was younger so I could enroll in one of Yanis’ classes or seminars. Thanks to internet my wish comes true (without change in age). Therefore as a student I have a question: A given in the example is that Ann visits the table first.Therefore it is up to her to manage the risk and she should proceed to call up Ben and make a deal that will maximize takes for both! She should tell him that the thing to do here is not to spend time analyzing the permutations, but getting around the rules so they can both enjoy the take. I am sure it was an Economist who made up the rules in the first place; otherwise they would instead of receiving the mandate for an in depth analysis (of sizable budget) would have given her one advice: “pick up the phone and call Ben” -:)

I just finished Minotaur & really enjoyed it. As someone who is starting to explore economics, Minotaur helped me gain a slightly better understanding of the systems that are consuming us and threatening our existence as a species. Thank you!

“Economists are smart people. They see that their advice to Ann in the gold sovereign game is pretty poor and realise that they must do better. But they are not prepared to do the decent thing… economists have, for a while now, pursued an agenda that denies economic complexity its true nature in order to maximise their own discursive power both in the great Universities and in the corridors of power (both public and corporate).”

These sections of text seem to favour “complexity denial as a problem of character”. But I think it is also a problem of faith. Some political leaders are people of “relatively good character” who do not appear to be simply pursuing agendas for their own aggrandizement: their faith in toxic theory is sincere.

United States GOP candidate Ron Paul comes to mind as an example. He preaches that the road to prosperity is Hayek’s free market (sola fide) combined with the inerrancy of the US constitution (sola scriptura). He is consistent and really believes what he says, and his sincerity has gained him an enthusiastic following. That said, I have little doubt that if his libertarian policies were implemented the US would not be for the better.

No, I do not believe it is a problem of character. It is, as you suggest, a matter of faith. But faith does not grow on trees. This particular faith is nurtured within a profession whose ‘success’ is predicated on perpetuating these most peculiar errors. In short, these are failures that lead to spectacular professional rewards. A most startling evolutionary process that creates powerful feedback effects between anti-scientific theoretical complexity and financialisation. But more on these in Parts B.C and D…

As a non-economist can I add that this reads like a clever exercise in hair-splitting? You contrast a “narrow sense of rationality” and (presumably) a wider sense of rationality. One takes into account a level of complexity that the other does not. But both are utterly dubious insofar as both are part of the problem – the deeper problem underlying the crisis in Europe at the moment, which could be termed a crisis of Reason – of what some people in Frankfurt once called instrumental reason. Although you want to rewrite the equation, for you it is still a matter of equations – of calculations. The wider sense of rationality still leaves Ann and Ben as monads trying to work out either how to get as much as possible for themselves or how to beat the other sucker. And it is interesting that for both senses of rationality the word “altruism” is synonymous with “irrational”.

Anyone with a shred of humanistic feeling left would see things very differently. They would see the scientists/economists sitting on the sidelines trying to develop the most predictive equations and they would see Ann and Ben in the centre anxiously trying to play a game according to rules that are going unquestioned – rules that set them against each other – rules that forbid any communication – that forbid the development of any meaningful relationship between them. Angry, they would push the scientists/economists to one side and start pleading with Ann and Ben to wake up and realise that things don’t have to be like this – things can be utterly different. The sense of reason doesn’t just have to be a tad wider. Reason can be utterly different. Altruism could itself be rational. Love could be rational. Love could be the basis for reason itself. Ann and Ben could get married in the Temple of Reason, start a revolution and change the rules so that the money gets divided in a just way without people having to walk up to the table and play a silly game that forces them to see others as their opponents. Something utterly new could come into being: a family, perhaps even a nation.

But I am not an economist, so perhaps I have failed to appreciate the complexity of the situation. Perhaps you are right, and because of all the accumulated historical complexities Ann and Ben are condemned to carry on playing the stupid game.

You are being unfair to me. I have built (even as a mathematically trained economist) my entire career on the argument that judgment is irreducible to calculation; that the problem is not that we have the wrong model of the economy in our heads but that we are seeking the truth about really existing capitalism in some mathematical model. This argument (in favour of informed judgment and against computation or modelling) is the very foundation of our recent book – see http://yanisvaroufakis.eu/books/modern-political-economics/.

I do not wish to be unfair. To sum up your main point here for the non-economists (like myself) I think you are saying that economic systems (like the ones collapsing at the moment) cannot be reduced to or identified with mathematical models. I agree, and to that extent society is not a mechanism (although there are tremendous forces that would encourage it to become more and more of a mechanism).

To be fair to you, we are arguing at cross purposes. Your point (I take it) is to improve economics (presumably by questioning its hubris). My concern is with improving Europe as a centre of civilisation. The general acceptance of the idea that society is a massively complex system whose management must be left to the technocrats is one reason for the rot. Although the initial thrust of your argument seemed to pull the rug from under the technocracts, I think that in the end you leave technocracy intact – perhaps even stronger – because what you flag initially as a critique of complexity fetishism ends up as an argument that actually the system is more complex than the mechanistic economists were making out. Complexity is fetishised even more.

In your post Ann and Ben are construed as having two choices: either they play the game in a way that fulfils the predictions of bad economists or they play it in a different way that frustrates those predictions (and supports your argument). The problem in Europe, though, is the game itself. Ann and Ben increasingly realise that it is a stupid game, and I would like to think that they are now busy in their European garrets making huge banners saying: “Make the Game History.”

That, though, is politics. My own feeling is that we need more politics and less economics. Of course we need brilliant economists like yourself, but as you hint, it is within the power of the Anns and Bens of this world to prove the economists wrong. I wonder if they will?

First of all, I just wish to disclose that I’m a former student of Yanis in Economics at the great Sydney University (the subject was “Strategic Behaviour” – effectively, elementary Game Theory, in 1998). He inspired me to major in Economics and I thought then what I still think today (in my life as a educator in taxation and policy): that Yanis will one day win or be seriously considered for the Economics Prize that greats like John Nash won before him. That said, I have one issue/problem: backward induction. It’s been, by Yanis et al, widely dismissed as an irrational thought process. I wrote a paper dismissing its value in modern socio-economic problems (as well as dismissing most other “rigid” economic theories). So I agree with Part A of the paper. But, let’s be frank: the problems are greed, weak governments and “economies”, like Greece, that have for too long committed 3 terrible sins: allowing wealth and power to be too concentrated among a select few; been too weak (and stupid) to create and impose proper tax systems (and enforcement methods) to properly fund necessary and desirable initiatives/policies/etc; and NOT PRODUCED ANYTHING whilst expecting that somehow their country’s GDP will be sustained or expanded. Why aren’t we discussing the main issue here? Greece (sorry to be so forthright) doesn’t do anything. It’s got tourism, shipping and … Nothing! And we’ve seen they can’t do what England or the USA (or, to a lesser, but growing, extent, Hong Kong and Singapore) try to do by being “financial centres”. They don’t lead the world in any technological or other exportable product and their institutions are weak at best. They may not have been bailed out before, but Greece has defaulted 75 (now 76) times in the last 150 years. This abject failure was a long, long time coming and having the best Economist in the world advising the (former) PM wasn’t even enough to save them. Complete rebuilding of the nation’s institutions (assuming they even retain sovereignty) and reprogramming of the people’s attitudes is the only way to give Greece even a hope of surviving beyond this century, at best. And the EU is gone. As long as we have net exporters in the North and net rorters in the South, we’ll never have a harmonious “union”. The Meditteranean states are a basket case. Surely we can’t argue that point? And I agree with Yanis’ recent Australian TV appearance (on ‘Insight’) where he stated that the Euro collapses within 48 hours of any member defaulting. That’s not too far away.
I look forward to all future instalments and I extend Yanis a sincere thank you for shedding light on the disgrace that is the European economy, and best wishes. I love reading your work, have your books and recommend you to all who care to learn the truths.

You needn’t be so chuffed. You’ve earned praise from places well beyond my standing. Even your mathematical analysis passes the rigorous testing of my ‘maths-guru’ brother – a PhD candidate who routinely tops/topped premium subjects in his university’s Mathematics faculty. You have the invaluable ability to analyse complex issues using simple language. I can only see two [2] ways to improve your commentary/analyses (in my humble opinion):
1. Greater regard for political implications of what are otherwise superb economic policies; and
2. More emphasis on how the Greek nation (people, institutions, etc) can recover and become a more sustainable economy (rather than shifting blame & attention to other responsible parties – e.g. banks – who may be at fault, but not to the extent that I fear you and many of your readers would like to believe).

Love your work and look forward to future analyses.
P.S. I’ll keep you on speed dial if the Australian Government needs a genius economic adviser.

Hi Yanni, I really enjoy your site and I’m ploughing through your book these days. I am not an economist and have UK A-level standard understanding of pure and applied maths — the way I’ve understood this is that the mathematical basis of such models stands on a superficial and totally artificial extrapolation of bluffs in an imaginary poker game (with two incredibly dim players, if I may add)!
In an attempt to comment from a more philosophical point of view, the mechanistic, Cartesian-Newtonian ‘scientific’ view of the world is itself losing grip with reality and fast heading for the history books — in fact, since the mid-1920s after the publication of A.N. Whitehead’s “Science and the Modern World”, this has been so. We have decoded the human genome yet still cannot explain why an eyeball takes the form it does (morphogenesis); we have analysed the neural highways connecting the ear and eye to the brain, yet we still cannot explain in what manner the brain interprets nor perceives sight and sound. There is more genetic ‘code’ in a unitary grain of rice than in a single human being… a fact, which should point to the final disregard of the mechanistic view of life in the natural sciences and, by extension, in the “aspiring-to-be-science” (so-called) humanities subjects. In my modest, lay view, as soon as all ‘scientists’ (real or wannabe) wake up and decide to put McLuhan’s ‘Gutenberg Galaxy’ to rest, the brighter the future for all… or will the push come from societies themselves…? Or would that be too chaotic? And what is chaos? — Hobbesian ‘hell’ or Hesiodic ‘heavenly creation’? Chaos theory for future mathematical economic modelling? 🙂 Keep up the good work

Nikos, by implication I think you are saying that Yanis’s title would have done better to flag the fetishism of theory, since that is the deeper problem. The problem with the idea of society as a mechanism is not that the metaphor is inappropriate but that this is another attempt to identify social life with a theoretical construct (and it doesn’t matter whether the theory is mechanistic, probablistic, chaotic or whatever). Insofar as we see that society needs fixing, we assume that first we need to find the right theory and then we can apply it and society will be saved. We have been trying to apply theories to society for a long time now, and there is plenty of “data” to indicate that the results have been unpleasant. Somehow we need to find a way of thinking beyond theory to recover a better (non-theoretical) understanding/appreciation of what social life at its best is and ought to be. As a first step (as far as books are concerned, and they may be the least valuable guides in this instance) we still have a hell of a lot to learn from Aristotle. What we need is neither chaos nor chaos theory, but a rebirth of a more classical political life.

Mr. Nikos don’t rush in dissming mechanistic-newtonian thinking! After all, it is the only way to calculate the mass of a galaxy, even today. You should be more careful when expressing your “philosophical” POV’s…

And a question to Mr. Varoufakis: what if the watchmaker model of Ann’s strategic thinking was attributed with trust instead of greed?

reply to Torn Half: I don’t know exactly what you mean by a more ‘classical’ political life — if you mean Aristotle’s view of the ‘city’ and the ‘state’ as a living, breathing thing, then yes… I would go for something like that. An ‘organismic’ view of politics and society is definitely more attractive than the Hobbesian ‘tyranny’ we live under today. This is kind of what I was getting at with the reference to McLuhan above… a “re-tribalisation” of the world, which may be interpreted as an Aristotelian community, or a global collection of Aristotelian ‘tribal’ communities (Aristotle would’ve probably said city-states, although I’m not too sure what he’d say of today’s mega-monsters… they would probably appear as mini-empires to him). Sounds idealistic, but one can dream

George: I didn’t dismiss mechanistic-Newtonian thinking… I said it is fast heading for the history books… ie: it has played its role in the history of science. Without it we would not have concluded that genes are responsible for cell synthesis, for example. Empiricism will always remain an important factor in science — but not act as an axiomatic ideology. However, as I mentioned above, the mechanistic theory fails to explain the NATURE OF LIFE, and by extension, human nature. Life, in my view, cannot be regarded as a closed system with irrefutable natural ‘laws’ forever applicable … to take your example, we can calculate the mass of the universe at particular times in its 15bn year existence yet cannot explain why it is evolving/growing the way it is. A mechanistic view of life would equate a human brain to a personal computer — a closed system with little prospect of ‘out-of-the-box’ growth. How uneventful, wouldn’t you say? Discarding this way of thinking, or rather, limiting its sweeping and general application to subjects ranging from biology to sociology and (as Yanis explains in this article) economics (ie: literally, begin to think outside the box, as cliche as it may sound) may help us make a very general step forward. Even its application to the physical sciences (which is where it originates) remains dubious. Do we really think that God/Nature/whichever divine force one believes in, created all these ‘laws of nature’ in a flash 15billion years ago and then went to sleep leaving this well-oiled machine to run endlessly? Can this overly simplistic logic really be applied to human nature? Is this all we think of ourselves? Alas, it impossible for me to prove what I am saying — as it is impossible for ‘Newtonians’ to prove that the mechanistic view of life is correct. To conclude, though, let us ponder the unassailable fact that the whole conceptualisation of a collection of some “Laws of Nature” is an anthropocentric construct — abstract thought, for all its beauty and power to spur imaginative creation, is also susceptible to periodic bursts of extreme self-indulgence — ask any artist, musician… and scientist! Respectfully,

I have been following your comments since October, all the way in Australia. Thanks for shedding light on the real going-ons with this whole Euro crisis, as if we relied on the mainstream or financial media, we’d truly be in the dark! The Minotaur is a good read too – for years I had the gut feeling that, surely, the US had used it’s privileged position post WWII in some way to construct our post-war reality, but as an interested amateur had lacked the intellectual framework in which to understand it. The Minotaur helps fill that gap.

Your blog here, is an interesting one. The same issue happens in other professions too. Having trained originally as an Allied Health professional myself, we were taught to view clients in a holistic manner in understanding and constructing their rehabilitation plans (an empowering view on the recovering individual, as opposed to the victim-oriented term of ‘patients’). The rehab plan was built around discovering what was valuable to the client in terms of short-term and long-term goals; in terms of daily activities; focusing on barriers affecting those goals; deconstructing the barriers, and then setting plans to help overcome them.

This, you see, was in contrast to the (still) predominant approach used by Medicine, i.e. doctors, GPs, and specialists, which is Reductionist and Mechanical. An approach which has worked wonderfully well in some respects. E.g. understanding the mechanics of the heart has resulted in life-saving surgical procedures. But what of the limits in other areas? Many ‘patients’ who have had back surgery, still suffer on an ongoing basis. They struggle to come to terms with the daily pain that will always exist, and most importantly, the deficit in their ability to perform daily activities. This then impacts on their valued roles (such as parent, worker, friend, etc), which then can result in ongoing psychological issues as the individual struggles to comprehend, and adapt, to fulfil their valued roles, which ultimately gives them purpose. According to the doctor though, the surgery was a success, and their response to these issues is to prescribe medication (which often simply masks the real problems) and refer them for some ‘counselling’ (which may help). However by this point the ‘patient’ is caught in a medical circus and many are truly passive victims by now.

In some areas of medicine now, this reductionist approach is developing intellectual frameworks which are truly bordering on intellectual fraud, and are causing conflicting views. The issue of Attention Deficit Hyperactivity Disorder is a case in point, with approx. 2.5%-7.5% of all children now meeting the diagnostic criteria (and need for treatment via prescription medication). If there is an attention disorder occurring, very little research has been done in the change in parenting and teaching methods over the last 20-30 years and their consequences. There is plenty of research on medication treatments though (yet, even these studies have fundamental flaws acknowledged by mainstream medical peers).

Now, bringing this back to your blog. The examples you give above suggest that a highly competitive, machiavellian, reductionist approach has taken Economics over (is this what is referred to as ‘game theory’?). The economist pre-supposes that ALL participants will have a self-interested outcome (naturally). However this self-interest is pre-defined within this narrow, machiavellian focus. Just like medicine, it ‘reduces’ the complexity of humans to a cookie-cutter approach, and does not allow for the participants to have a say in creating their new reality. And because of that, there is a massive cost in terms of lost future opportunities.

For example, what if Ann and Ben negotiated a mutually acceptable outcome to this game? After all, what do they intend to do with all those coins once they have them? Is there the possibility of future cooperation to create new realities, with this collective resource? On what basis, and for what reason? How can they possibly learn to trust each other if they can’t get this first step right?

Of course the misanthropist would say, Ann can learn what Ben’s goal is, and see how she can leverage her situation to achieve her goal, while denying Ben his. A behaviour not uncommon in our universities perhaps, (the petri dishes of human knowledge) where a student’s mark is not simply dependent on achieving a prescribed goal, but is also then adjusted according to a Bell Curve, where some students will be elevated at the expense of others. And how do the motivated students achieve their status as high performers? By harnessing their considerable intellectual brainpower – not to identify flaws in existing systems – but to reinforce the intellectual framework of the status quo.

Yanis, thanks for the space on your blog. Looking forward to Part C and D.

Thank you for this insightful glimpse from another realm. Regarding economics, I must say that the problem with its approach to socio-economic life is deeper than you suggest. It is not so much that it posits a simplistic model of men and women, straw people who resemble self-centred caricatures of real humans. All models must, by definition, abstract from reality and posit simplifications – at least at the outset so as to get a handle of the complexity they strive to explain. No, the problem lies elsewhere. In particular, in the simple fact that, even with these simulacra, their models cannot be ‘closed’, or solved, until and unless they make, and remain committed to, some preposterous assumptions – assumptions that either defy logic (e.g. that there is no time) or are logically incoherent.

You were always good at teaching backwards induction at class Yanis.
Too bad you also introduced us as students to the “common knowledge of rationality” concept. In one stroke, you eliminated game theory as a panacea for social choice, alongside with the fallacy of a “unique Nash equilibrium” concept in actuality. 🙂

3 Trackbacks

US

Thank you for visiting my blog. As you have just clicked on ABOUT, I take the liberty of assuming that a tale on how this blog came into being, as well as a few intimate details on its author, may be in order